BY BAMIDELE FAMOOFO
Cadbury Nigeria (Cadbury) maintained positive topline growth in the year ended December 2021, despite some headwinds including rising inflationary pressures and currency volatility. However, a significant increase in the cost of production, owing to higher raw materials and freight costs, exerted upward pressure on operating expenses, which weighed heavily on the company’s bottom line in 2021.
Impressive growth in turnover
Cadbury’s turnover spiked by 19.66% to N42.37 billion in FY ’21, compared to N35.41billion in the corresponding period in 2020. The surge in the company’s turnover is a result of an improvement recorded in its reported business segments (refreshment beverages and confectionery). Revenue generated from refreshment beverages and confectionery grew by 29.68% and 14.39%, respectively. Furthermore, the company’s gross profit recorded a moderate growth of 9.83% to reach N6.48 billion in December, 2021. This was despite a 21.62% increase in the company’s cost of sales, owing to a 48.54% surge in the costs of raw and packaging materials.
Strong topline growth buoyed operating profit
Cadbury reported an operating profit of N491.47 million, which was 74.39% higher than the N281.82 million reported in the corresponding period in 2020. The robust growth in operating profit can be largely attributed to the uptick in the company’s gross revenue. This offset the impact of the 10.48% growth in selling and distribution expenses, which rose to N5.06 billion. During the period under review, the company’s net finance income surged by 380.39% to N606.45 million. This is primarily attributable to a 571.71% uptick in its finance income, owing to a higher interest income on bank deposits compared to the previous year, which more than made up for the acceleration in Cadbury’s finance cost. Meanwhile, the company’s long term borrowings now stand at N6.60 billion.
Rising inflationary pressures subdued bottom-line growth
The company’s profit after tax recorded a 51.74% decline to close at N449.71 million in the year ended December 2021. A higher than proportional growth in the company’s production cost had spillover effects on Cadbury’s bottom-line, resulting in the lackluster performance. The country’s current macroeconomic state, amid double-digit food inflation, volatility in the FX markets and rising global commodity prices, presents a major risk to Cadbury’s future profitability. In addition, intense competition, especially in the beverage segment, remains a threat to the company’s growth.
“The major risks that may prevent Cadbury from achieving its goals of improved earnings, boosted sales and managed costs include persistent macroeconomic challenges, credit risk, liquidity risk, market risk (currency, interest rate and equity prices), and capital management risk
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Industry overview
During the period under review, the performance of FMCG firms was mostly tepid, reflecting the numerous challenges organizations within the sector were faced with. Extensive weakening of consumer income due to surging prices, lingering impact of the Covid-19 pandemic on business segments, and exchange rate depreciation combined to impair corporate performance of FMCGs.
Furthermore, companies continued to grapple with rising production costs due to escalating raw materials, energy, and transportation costs. Looking forward, the dwindling purchasing power of Nigerian consumers will continue to weigh on the sector. Furthermore, the prevalence of insecurity in northern Nigeria, and the deleterious effects of the Ukraine war on commodity prices and energy costs will continue to impair food production and other intermediate inputs. Considering these factors, consumers are expected to prepare for a challenging year, with spending power and budget flexibility being important considerations. As a result, FMCG firms are expected to be severely pressured during the course of the year. With increasing poverty levels and decreasing consumer income, more products are expected to be pushed into the premium end of the market. That said, the expected increase in product elasticity of FMCGs will limit the ability of companies within the sector to raise prices as volumes will suffer, considering the prevailing low-income levels of consumers.
Company overview
Cadbury was incorporated in Nigeria in January 1965 and subsequently listed on the Nigeria Stock Exchange in 1976. Before listing on the NSE, Cadbury predominantly re-packed imported bulk products, but with its listing, it grew rapidly into a full-fledged manufacturer. The parent company, Mondelńz International (formerly Kraft Foods Inc.) has a majority equity interest of 74.97% in Cadbury through its holding in Cadbury Schweppes Overseas Limited. Mondelńz International is one of the largest confectionery food and beverage companies in the world. It remains a dominant player for chocolate, biscuits and gum and candy offerings. Cadbury Nigeria currently produces and markets branded fast-moving consumer goods such as refreshment beverages and confectionery. It also exports intermediate cocoa products to Europe and the rest of Africa. The beverage segment accounts for 58% of revenue.
Confectionary accounts for 26% and intermediate cocoa products for 16%. Cadbury Plc’s rivals remain Nestlé and Unilever. Nestlé Nigeria Plc is currently the largest in the food and nutrition segment. Nestlé continues to benefit from a favorable volume product mix, as it remains the dominant player in most of its segments. Local players in the industry include UACN, SweetCo Foods and Promasidor, who are also diversified food companies. Like Cadbury, they have lagged compared to Nestlé due to a combination of production constraints and the intense rivalry in a highly price-sensitive market.
Green Flags
•Cadbury is a dominant player in the food and beverage industry in Nigeria.
•Superior and recognizable brand value
•Strategic alliance and support from parent company
•Innovative initiatives to improve appeal and customer satisfaction
Red Flags
•Intense competition from other leading players such as Unilever and Nestlé
•Weak consumers’ purchasing power
•Persistent macroeconomic headwinds could dampen consumer demand
•Shift of market preference to low-priced products
•Narrow product range
Risks and outlook
The major risks that may prevent Cadbury from achieving its goals of improved earnings, boosted sales and managed costs include persistent macroeconomic challenges, credit risk, liquidity risk, market risk (currency, interest rate and equity prices), and capital management risk.
The company’s exposure to credit risk is mainly influenced by the individual characteristics of each customer.
The company mitigates this risk by establishing a credit policy where each customer is analysed for creditworthiness. Liquidity risk is the risk that the company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or other financial assets.
The company mitigates this risk by ensuring that it always has enough liquidity to meet its liabilities when due without incurring unacceptable losses or risking damage to the company’s reputation.
Market risk is the risk that is generated by market prices, foreign exchange rates, interest rates and equity prices and how they will affect the company’s income or the value of its holdings of financial instruments.
The company mitigates this risk by ensuring that its net exposure in respect of monetary assets and liabilities denominated in foreign currencies are kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short term imbalances. In order to maintain investor, creditor, and market confidence, and to sustain future development of the business, the company continues to maintain a strong capital base as well as monitors the return on capital.
